The European debt crisis is bringing Italy into uncharted waters. With an over-400 basis point spread between Italian bonds and German bunds, a 1,900 billion euro public debt, and zero growth prospects for 2012, Italy could soon be at the centre of the storm.
While the public debt to GDP ratio has increased by around 35% since the 2007 financial crisis in OECD countries as a whole, Italyis a very different case. Its public debt to GDP ratio was already 124.8% in 1994. It then declined in the late nineties and is now back up at 120% of GDP. Clearly Italians have extensive experience in living with high levels of public debt.
Although Italy engaged in fiscal consolidation during the 1990s, the sad truth is that the process was not driven by the aim of crafting a more sustainable governmental machine. Italy progressed impressively towards the threshold of a deficit below 3% of GDP, as required by the Maastricht Treaty, but that goal was reached by means of temporary measures and mainly via increases in tax revenues. Italyundertook major privatisations (highways, telecoms, energy) to raise funds but without fully transitioning to a market economy.
Later years saw a lack of substantial reform, with no major steps forward in regulated markets that badly needed liberalisation. Although the labour market was partly liberalised, for example, strict regulations remained in place regarding firing staff. Our Index of Liberalisation estimates that the liberalisation index of the Italian labour market is just 60% of the British benchmark we adopted.
So, what should the government do now, in the context of the current crisis?
The quickest answer lies in one word: privatisation. The Italian state owns assets worth €1,800bn. Not all of them can be privatised quickly. Nonetheless, Istituto Bruno Leoni, among others, has estimated that the Treasury still holds €100bn in listed or private companies that could be released to the market.
This includes shares in the energy giants ENIand ENEL, 100% of the post and railways monopolies (Poste Italiane and Ferrovie dell Stato), a fully state-owned insurer against accidents at work (INAIL), an insurance company that guarantees to domestic entrepreneurs against political and commercial risks linked with the export of goods and services (SACE) and many others.
On the top of that, the Italian national and local governments own €400bn in real estate. The Berlusconi government is planning to sell some - for a value of €5bn euros a year for three years, which means €15bn all together, i.e. less than 5% of those assets and less than 1% of the total public debt.
It is amazing that, for purely ideological reasons, the Italian government is not undertaking privatisations that would both contribute to the objective of reducing public debt and release still monopolised business sectors to entrepreneurial creativity.
It has often been lamented that Italy's problem is one of credibility. This is true. Italyis not a country without strengths: impressive private savings and strong entrepreneurs are the two most relevant ones. Still, incentives matter. In a world where capital is far more mobile than in the past, Italy's intricate and unpredictable regulations, plus its heavy taxation, make it an unlikely candidate for more investment.
Italians have long waited for a simplification of their legal codes and deep tax cuts. Yet the ingrained resistance of interest groups to a strong restructuring of public finances and, thus, of the scope of government, has made such policies impossible.
Mr Berlusconi and the Italian government should now be what they have never been: bold. This is the right moment to start long awaited liberalisation, aiming at boosting growth. But since the effects of liberalisation take time to materialise, the markets must be reassured of the Italian government's seriousness in getting public debt under control. Privatisation is the right instrument to achieve this.
Dr Alberto Mingardi is Director General of Istituto Bruno Leoni (www.brunoleoni.it).